I have long thought that RBS owning up to its stretched balance sheet would mark the bottom. If this is the bottom is there any upside or just more sideways movement.
RBS considers rights issue
By Peter Thal Larsen, Jane Croft and James Mackintosh in London
Published: April 17 2008 20:20 | Last updated: April 17 2008 23:43
The Royal Bank of Scotland is considering launching a massive rights issue to rebuild its capital reserves, a sharp reversal of its previous position that could trigger a wave of similar offerings by other lenders.
The rights issue is one of a number of options RBS is considering, people familiar with the matter said, stressing that the board of directors had not yet made any decisions. The bank is expected to unveil plans at its annual meeting next Wednesday.
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A cash call by RBS would help strengthen its capital reserves, which have been stretched to the limit by its role in leading the €71bn (£57bn) break-up bid for ABN Amro, the Dutch lender, last year. That deal has looked increasingly ill-judged as turmoil in the capital markets has prompted an increased focus on banks’ balance sheets.
It was unclear on Thursday night how much fresh capital RBS might seek, but it is likely to be a substantial sum. Analysts at UBS calculate that RBS needs an additional £9bn merely to bring its capital ratios into line with other UK banks. But given the mounting pressure from regulators, RBS is likely to seek significantly more. The bank is also expected to explore the sale of some businesses, including its Direct Line insurance subsidiary.
Though analysts have been predicting an RBS rights issue for several months, the move would, nonetheless, mark a dramatic U-turn for Sir Fred Goodwin, its chief executive, who has repeatedly insisted that the bank does not need more capital.
A cash call would be likely to trigger calls from shareholders for the departure of Sir Fred, who brushed aside widespread scepticism to take control of ABN Amro last summer.
But RBS is likely to argue that the ABN Amro deal is performing better than initially expected, and that Sir Fred remains the best-qualified executive to ensure the deal is a success.
RBS’s hand may be strengthened if other British banks follow its lead. Reaction to the bank’s decision will be closely watched by rivals such as Barclays and HBOS, which are also under pressure to raise fresh capital. Politicians and regulators have in recent weeks called on banks to raise fresh capital rather than reining in lending.
A rights issue by RBS would mark the first significant reaction to the credit squeeze by a European bank aside from UBS, the Swiss bank that has suffered heavy losses. European banks’ reluctance to issue capital is in stark contrast to lenders in the US, which have been faster to replenish their capital.
RBS on Thursday night said it noted speculation about a “possible rights issue” and added: “RBS confirms that its Interim Management Statement covering trading performance and capital will be made next week.”
RBS shares fell 2.4 per cent to close at £3.66, valuing the bank at about £37bn.
